As 2016 drew to a close, many people let out a collective sigh of relief that we could finally put a tumultuous year behind us. For better or worse, 2016 was marked by a number of disruptive events. While the world of corporate governance was not immune to these changes, developments in this area are largely on a different trajectory.
In 2017 I see some positive trends continuing, other trends gaining steam, and a few new developments on the horizon.
Competence over connections
It would seem obvious: supervisory board positions should be filled by the most competent candidates. In practice, however, this is not always the case. Often, it’s personal connections that play a more important role when filling supervisory board positions, but in recent years, the competence of candidates has become a more prominent consideration. I am happy to say this trend will continue in 2017.
I think the important thing to note here is that this development – like many aspects of business – is driven by investors. Across the board, investors are paying more and more attention to the inner-working of companies, from CSR policies to – you guessed it – supervisory board members. I can only encourage supervisory boards to take note and fill positions accordingly.
Related to the competency of a supervisory board is the diversity of its members. 2017 will see a record number of new appointees to German supervisory boards: are these going to simply be the same names rotating to new positions, or will German supervisory boards benefit from a diverse mix of age, gender, and backgrounds?
Fresh perspectives are certainly useful for any supervisory board, but again, the competency of candidates must be the highest priority. For example, many boards are looking for female candidates to meet Germany’s quota of women in the boardroom. Disruptive digital thinkers are also widely sought.
But boards must take the time to ask the key question: does a candidate have the basic knowledge corporate finance, accounting, compliance and strategy (to list a few examples) to actively participate in supervisory board meetings? The first step in answering this question is to get some new names on the short lists that will be created to fill upcoming board vacancies in 2017 – I assure you every currently underrepresented group has plenty of qualified candidates to offer.
Supervisory board pros
Once upon a time, a supervisory board nomination was a badge of honor for those lucky enough to receive it. Now, thankfully, more and more members are seeing a nomination for what it really is: a job that is to be taken seriously.
This manifests itself in two points in particular. First, look for supervisory boards to be very cautious in nominating new members who bring along several other board mandates (“overboarding”). Shareholder advisors have put new guidance in place on the matter, cautioning investors from lending support to board candidates who are spread too thin. These advisors tend to set the pace; Glass Lewis will only accept candidates with five simultaneous supervisory board mandates (down from six) and will limit that to two for active managers.
The other is a topic I’ve written about before: the digitalization of the boardroom. Digitalization and globalization are forcing companies to adapt to new realities, and supervisory boards must keep up with these changes. Look for this to be a major factor in new supervisory board member selection in 2017.
TBD in 2017:
– What is a fair and reasonable pay for a CEO? Hermes has put this issue on their annual meeting agenda, and other companies will do the same. Depending on the outcome of federal elections in Germany later this year, we could see a government led by the Social Democrats that might address the issue at the legislative level.
– What belongs in a corporate governance code? In our work at VARD (Association of Supervisory Boards in Germany), we are actively involved in shaping Germany’s corporate governance code and by keeping abreast of developments on codes in other countries. One thing we’ve noticed: sometimes, corporate governance is not treated as a set of guiding principles but as a pedestal to claim high ethical standards and investor-friendly policies. Drawing the lines on this issue is an ongoing debate I look forward to joining.
– How much influence will investors have? Pressure from investors has led some companies and investment funds to divest from oil holdings. Investors have also pushed companies to adopt stricter CSR standards. While investor influence is nothing new, highly-organized groups of investors are putting their weight behind a number of issues, and I am curious to see what topics they will tackle in 2017.